Wednesday, February 26, 2014

The Census Bureau released its new home sales report for January today. It showed nearly a 10% increase in sales from December to January and an increase over January 2013. The only problem with this report is that it has holes in the numbers that are wider than the Mariana Trench is deep.

To begin with, please keep in mind that the headline numbers reflect a seasonally adjusted annualized rate (SAAR). This means that the numbers collected by the Census Bureau are fed into a statistical model that spits out a result and we have no idea whatsoever how the result was calculated. This is common across all Government economic reports and results in a high degree of reporting errors and bias to the upside, especially when a rising trend is followed by declining trend, such as is the case with the current housing market.

Instead of looking at the SAAR, it's more useful for analyzing the data by looking at the unadjusted monthly data, which is included in the Govt report - LINK - but never reported by the media or discussed by Wall Street analysts. As I'll show, it is this aspect of the data that is an inconvenient truth and I suspect it will eventually be removed from the report, just like the Fed removed M3 from its reports.

If you look at the link, you'll see that in January a total of 34,000 homes were preliminarily estimated to have been "sold." I say "sold" because the Census Bureau records a sale when a contract is signed - not when a home is delivered, escrow clears and title is transferred. Currently most big homebuilders are reporting a 25% cancellation rate on homes "sold." If we apply this rate to the 34k number, we get 26k (rounding up) as the actual number of homes that might eventually be delivered and constitute a real sale, or cash generating economic event. If we annualize this number, we get an annualized sales rate based on January's contract signings + likely cancellations of 312,000. Note that this varies significantly from the 468k SAAR reported by the Govt.

Even if I give the numbers the benefit of seasonality, there's no way a number which is based on January's contract signings and includes cancellations would come anywhere near 400k. One more important point of note. When a contract "sale" as reported by the Govt is cancelled, the Govt does not subtract this from previous "sales" reports. From the Census Bureau site: "The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts"(LINK). You'll also note that, as I stated above, the Govt admits that when the market is declining this report and the methodology used overstates the results. This is what is happening now.
A second source of fraud/incompetence is that the reported increase of sales for January is completely inconsistent with the mortgage purchase application data released weekly by the Mortgage Bankers Association. Since the early fall of 2013, this report has been showing a decline almost every week. Since 2014 began, it's been showing double digit year over year declines almost every week. Now, we know from this data - (LINK) - that mortgages are used in close to 95% of all new home purchases. January 2013 to January 2014 showed a double digit decline in mortgage purchase applications. Same for December. How is it possible that new home sales increased 10% from December to January and 2% from January this year from January 2013?

It has been suggested that perhaps investors started buying new homes to rent out. While it is possible, that theory is entirely inconsistent with the rate of return model being used by these investors, who require the low cost basis of distressed homes to make their ROR models work. New homes are significantly more expensive than a distressed home, or even non-distressed existing homes, and therefore it is highly improbable that investors are flocking to buy new homes.

Instead, it would appear that the Government report is seeded in fraud or incompetence. One last point, we've have had the "bad weather" narrative shoved in our face ad nauseum with every economic report that is showing weakness during January. However, you'll note that the Government is reporting that the northeast and the south - the two regions which were hit with several bad weather days in January - are both registering increase home "sales" for January over December.

How is it possible that consumers in both the northeast and south decided to stay home in January and not spend money on anything except a new home? Are they buying these homes from Amazon.com and Ebay? By the way, online sales tanked hard in January too. The answer is: fraudulent or incompetent reporting.

In the Atlanta area there are new homes being built and sold. This is taking place in developments which were under construction for infrastructure in 2008-09 but building never started. Most of the 2008 developers went out of business and the banks are no longer wanting to hold the lots until prices improve and are dumping the lots at 10 cents on the dollar. The lower lot prices allow for the new homes to compete with built homes that are under water. This is happening all over north Atlanta.

Desperate men do desperate things. Desperate things come in all shapes and sizes . There will be no end to the ongoing lies , miscalculations , deceitful deeds , erroneous calculations , etc., regardless of who's wearing a suit.We are being controlled by a den of thieves and now murderers !It's only going to get worse. Best to spend the time preparing for the outcome which won't be pretty when the fat lady sings!

Do we know with certainty that the numbers do not include purchases of the little plastic green houses in Monopoly? I had 3 of them on Marvin Gardens alone last week.

If you think the numbers are jacked now, just wait until they start using the Bud Konheim method of calculating sales - every time Sears sells a Kenmore refrigerator they count it as a new home purchase. Just take the outer shipping box, add a beanbag chair and a 6-pack of sterno and you've got low-income housing.

Too bad about M3 not being reported, and soon-to-be removed unadjusted data. Thank God the CBO still publishes the Alternative Fiscal Scenario (AFS) in its Long-Term Budget Outlook, which is the dire path we are on unless drastic changes are made immediately. They wouldn't think of removing the far and away most likely scenario we face since we can't cut anything except military (cue white eye rollback!).

When two people I respect in the US RE mkt. come to the same conclusion (about the new house sale numbers for Jan.), it is likely that they're both correct, and the statistics are wrong. Both Dave and Mark are on the same page here (with me). :)

Yesterday's "better than expected" New Home sales served as the "good news" pre-market boost to send futures ramping higher once again, if not enough to cause a fresh all time high.

Here is what really happened when one spreads the numbers, courtesy of Mark Hanson's housing blog.

This New Home Sales data are virtually worthless due to what I call "the laws of small numbers".

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The fundamentals are weak and deteriorating. Stimulus and mis-allocation of capital (malinvestment) have temporarily created an "echo" bubble over the past few years, with the primary focus to assist the zombie banks (thanks FASB). I think that is now over too, and the next step is reversion to the mean. Translation: lower prices, sales, etc. If there's any doubt, just wait until April. This is a Potemkin recovery. That goes for housing and the overall US economy. Gov't is too large. When gov't. grows it takes away from the real economy (private sector) in a parasitic relationship that eventually kills the host.

“The problem with socialism is that you eventually run out of other people's money [to spend].”- Margaret Thatcher

Eric Arthur Blair aka George Orwell

"Hope" is not a valid investment strategy

Full Time Jobs Over Last 5 Years

Is Your Gold Missing?

Why Gold?

Gold is the world's oldest currency. You exchange your fiat currency (dollars, euros, yen, yuan) into gold as an insurance policy against catastrophic Central Bank and Government policies which serve to destroy the value of fiat currencies and destroy democracy.

Gold can ONLY be considered an investment to the extent that it remains significantly and historically undervalued in relation to the fiat currencies against which its value is measured. Otherwise it remains the world's oldest currency and is completely free from the counterparty risk associated with currency by Government fiat (i.e. fiat currencies rely on a Government's "full faith and credit.")

Epic Quote - "Jesse" Sent This To Me

"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous

The Basic Fundamental Problem

What's the solution?

“THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS THE RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION OR LATER AS A FINAL AND TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED.”

Ludwig von Mises – Austrian Economist (1881- 1973)

Quote Of The Month Courtesy of "Jesse"

Unfortunately for Larry Summers, Ben Bernanke, and their friends at the BIS, they have not yet figured out how to print physical gold, silver, and other essential commodities, and the world is reaching the point where it might simply start ignoring the New York based markets with respect to essential commodities such as basic materials, oil, foodstuffs, and the like, as they become increasingly irrelevant, fraudulent, and Orwellian. And then where will the financial engineers be, except with no more excuses and no place to hide?

Great Quote From Jim Rogers On Govt CPI Reporting

JR: I mean, we have inflation now. If you go to the shop, whether it’s groceries, or education or insurance or health care, prices are going up for everything. The government lies about it in the US. Some countries lie, many countries don’t: Australia, China, India and Norway. Many countries don’t lie about it and acknowledge that we have inflation. Others lie about it, the UK and the US, but if you go shopping you know prices are up.

Q: Are you saying that the American Consumer Price Index (CPI) published by the US Bureau of Labor Statistics is a lie? JR: In my opinion, yes, of course it is. Have you looked at it? They’ve changed their accounting several times in the past few decades. When housing was 20% to 25% of the CPI and housing was going up, they didn’t count it, saying rents weren’t going up, and then when home prices started going down, they counted it. It’s the same with many things. It’s staggering some of the tortuous reasoning that the BLS has used over the past 25 or 30 years. When the price of gasoline goes up, they say it’s not really going up because it’s better gasoline, better quality, therefore you’re getting more for your money. I mean, it’s endless, the stuff that they say and for some reason people sit there, although more and more people are catching on, and accept what the government says.

Priceless Quote From Richard Russell

On Larry Summers: This doofus practically ruined Harvard when he headed it. I can't think of a worse choice to be chief economic advisor. I wouldn't trust Summers to manage a Starbucks franchise.

Quote of the Week

"The primary function of a Central Bank is to engage in the massive transfer of wealth from the middle class to the wealthy elite. The Federal Reserve was set up to do this with the blessing and support of Congress." - Dave in Denver

If you refuse to believe the above, please read "The Creature From Jekyll Island: A Second Look at the Federal Reserve" by G. Edward Griffin and then explain to me why the Senate voted down the Vitter Amendment and Congress refuses to pass a law requiring a full audit of the Fed, even though the Fed is using taxpayer-backed money to bailout Wall Street and Europe.

Quote of the Month

And very relevant in the context of yesterday's post about gold moving higher against all fiat currencies:

Just imagine what would happen if a mere ten percent of the money currently going into bonds were instead to go into gold. As in 1972, the real move has yet to begin.

- Murray Pollit, Pollit & Co.

A Picture Says It All...

www.moneyandmarkets.com

Golden ore samples produced by Eurasian Minerals

Undisclosed exploration site

The Next Reserve Currency?

1 oz. Chinese Panda

Guess who said this?

Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies...What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.

-Alan Greenspan, 9 Sep 2009

THIS is what REAL money looks like

1 oz. Gold Eagles

Alan Greenspan said what?

“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

From "Gold and Economic Freedom" a 1966 Essay by Alan Greenspan

About Me

I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for a large bank. I have an MBA from the University of Chicago, with a concentration in accounting and finance.
Currently I co-manage a precious metals and mining stock investment fund in Denver.
My goal is to help people understand and analyze what is really going on in our financial system and economy.